Companies maintain bank accounts that help facilitate payments to suppliers and other parties. These accounts also serve as a container for their cash and help safeguard it. On top of that, companies can also receive funds from their customers through their bank accounts. Banks also provide companies with a wide range of other facilities that help with the business. For example, they also provide loans or leases.
In the modern era, companies make most payments and receipts online. It includes cash-less transactions and processes to receive and pay funds. In some cases, they may also link their bank accounts with accounting software to automate the process. However, some companies also use checks to conduct transactions through banks. This process has been a norm in the business industry for a long time.
Checks have been the standard for receipts and payments for most companies. They provide more control over who companies receive funds from or pay. However, they may also come with some issues which have existed for a long time. One such problem with checks is NSF checks, also known as non-sufficient funds. These checks can be challenging to account for and record on a journal entry.
What is an NSF check?
Companies pay their suppliers through checks. Often, companies ensure they have enough funds in their bank accounts to conduct the payment. In some cases, they may also require the other party to wait before cashing in the check. Either way, companies ascertain that the bank will process the payment when the holder presents the check. Sometimes, however, that may not be possible.
Similarly, companies receive checks from their customers. In this case, the customers may also ensure they have enough funds to repay the company. However, when the company presents the check, the bank account may not have enough balance. In both cases, the party who submits the check will get denied payment from the bank. The bank will also return the check and mark it as NSF or non-sufficient funds.
Therefore, a non-sufficient fund check represents a bank check returned by the bank. It is also a check denied by the bank due to the unavailability of funds in the account. The bank also stamps it with the initials NSF. In some cases, banks also charge a fee for these checks, which can be high for the presenter. Nonetheless, the presenting party does not receive any funds in exchange for the check.
Some companies also maintain an overdraft facility. This way, if their accounts do not have funds, they can make payments. However, this facility also comes with a limit. If that limit is reached, the bank will refuse to process further checks for the bank account. Therefore, an overdraft facility does not eliminate the possibility of NSF checks. Instead, it increases the limit at which a check becomes NSF.
Overall, an NSF check represents checks returned by a bank due to the unavailability of funds in the account. Companies may be on the giving or receiving end of these checks. Either way, the accounting and journal entries for NSF checks will differ. Nonetheless, the party that presents the check does not receive funds in exchange for the fund. The bank may also notify the account holder of such instances.
What is the accounting for NSF checks?
The accounting for NSF checks is the opposite of when companies receive a check. Usually, when a customer issues a check to a company, it represents a reduction in their balance. In accounting, companies must account for the check when they receive it. Regardless of when they present it for payment, companies must record the payment from the customer.
Several periods may pass when a company receives a check and submits it for payment. At this time, the customer’s account may have depleted its funds. Subsequently, when the company presents the check, it will not receive the funds. This process creates an issue as the company has already recorded a receipt in their books. Companies cannot delete or remove the initial accounting entry.
Instead, they must account for the NSF check separately. The initial receipt of a check from a customer entails altering two accounts. The first is the accounts receivable balance for that customer. On the other hand, it also impacts the bank balance or cash in hand. The latter treatment will differ based on whether companies intend to receive funds or transfer them to their bank.
The accounting treatment for NSF checks is the opposite of that treatment. Here, the company must reduce the cash or bank balance in their books. On the other hand, they will also increase the accounts receivable balance for that customer again. This way, companies can reverse the impact of the initial journal entry. As mentioned, the bank may also charge a fee on this check sometimes.
The fee charged on the NSF check paid by the company does not become an expense. Instead, it also increases the customer’s receivable balance. This way, the company does not suffer from presenting a check with insufficient funds. However, the customer incurs the charge and repays the company later. This process is also part of the accounting for NSF checks.
How to record NSF check on journal entry?
Recording NSF checks on journal entries entails two steps. The first is determining the customer account to charge in the books. Usually, companies know which customer the check is and can restore the balance. The other step includes determining whether the bank charges a fee on the NSF check. As mentioned, this step requires companies to increase the customer’s balance even further.
When a company gets an NSF check, it can use the following journal entries to record it.
| Date | Particulars | Dr | Cr |
| Accounts receivable | XXXX | ||
| Bank or cash | XXXX |
As mentioned, the credit side of the journal entry will differ. Companies may increase the cash or bank balance in the initial entry when receiving customer checks. Usually, it is the latter account which the entry impacts. With this entry, they can decrease that balance.
If companies pay a charge for the NSF check, they must also record it. For that, they will increase the receivable balance for the customer. In exchange, they credit the bank/cash account based on the payment source.
Companies can record NSF check fees on journal entries as follows.
| Date | Particulars | Dr | Cr |
| Accounts receivable (charge) | XXXX | ||
| Bank or cash | XXXX |
Example
A company, ABC Co., receives a check from a customer for $10,000. At that time, the company makes the following journal entries to record it.
| Date | Particulars | Dr | Cr |
| Bank | $10,000 | ||
| Accounts receivable | $10,000 |
One week later, ABC Co. presents the check to the customer’s bank for receipt. However, the bank notifies the company that the customer does not have enough funds in their account. On top of that, the bank charges ABC Co. a $50 fee for the NSF check. The company pays it in cash. At this point, the company must reverse the initial entry and account for the NSF check.
ABC Co. uses the following journal entries to record the NSF check.
| Date | Particulars | Dr | Cr |
| Accounts receivable | $10,050 | ||
| Cash | $50 | ||
| Bank | $10,000 |
Conclusion
Companies pay and receive checks from different parties. Usually, the payer ensures their bank has funds to support the check. Sometimes, however, the bank account may not have sufficient funds. In those cases, banks will return the check to the presenter and mark it as non-sufficient funds or NSF. Companies record NSF check on a journal entry by reversing the initial receipt entry.
